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Friday, January 9, 2009

New world order will emerge in 2009, with U.S. plunging

By Paul KennedyUpdated: 01/05/2009 11:07:49 AM MST

Every so often in the history of international affairs, a great transnational turbulence shakes the foundations of the world and brings many of its older structures tumbling to the ground, as we witnessed in 1919, 1945 and 1989. In the confusion and babble that follow, it's difficult to see through the dust and recognize the shape of the altered strategic landscape.

Peering through the wreckage of the past year's financial crisis, it seems clear that every nation was a loser in 2008. The world's developed economies have taken a heavy beating, whether measured by their collapsing industrial production, tumbling exports, surging unemployment, frozen credit markets or the near- paralysis of maritime trade.

Yet we also hear cries of distress across the globe. Vladimir Putin's proud Russia is reeling toward internal collapse. China is sending factory workers home to the countryside. The International Monetary Fund is trying to rescue Iceland and Ukraine from economic oblivion. Brazil's currency is plummeting against the U.S. dollar. And the brief honeymoon for commodity-exporting African countries is over. Which national economy didn't take a blow to the head in this annus horribilus?

When the dust settles, will we see all countries equally battered, like the streets of Dresden after the Allied bombings in February 1945? Will every power simply have taken several steps backwards, so that the "order of things" that existed in January 2008 will be the

same in December 2009? I doubt it.

In the midst of general turmoil, there are always relative winners and losers. Those who are likely to lose most in the coming year will include Russia, Venezuela and Iran (too dependent on oil), most of Africa and Latin America (too tied to commodities), and Japan, Taiwan and South Korea (too wedded to exports, shipping, electronics).

By contrast, and unless it falls into the trap of a Pakistan war, India will advance; none of its banks (so far) are on the Bear Stearns Cos. track. China will take hits, but that probably means an increase in economic growth of 5 percent or 6 percent, deriving more from domestic development, and less from cheap exports.

Europe's prospects for 2009 are mixed, which is simply another way of saying that here, too, there will be relative winners and losers. Norway will ride the storm on its still-massive currency reserve and the rest of Scandinavia has strength in depth -- unlike the less competitive economies of East and Central Europe. Germany's combination of ultra-high-quality production, superb infrastructure and financial caution (few Germans use credit cards: Americans, take note!) give it strengths that are lacking in the U.K., France, Italy, Spain, Greece and other European countries that fell for easy credit and large government deficits. Prussian fiscal rectitude will keep the euro high, and compound the dollar's weaknesses.

The biggest question concerns the United States. My instinct tells me it will lose ground in 2009. I simply don't see how the Treasury can print $1 trillion to cover deficit spending, offer those bills at very low interest rates, and expect foreigners (not Americans, because we don't have the savings) to buy them, persuading the world to keep afloat its greatest debtor since Phillip II of Spain. Why should sensible Chinese investors do that when they can buy Swiss bonds, gold, or Scottish real estate? Yet if Asians decline to buy tens of billions of Treasuries each month in 2009, U.S. interest rates will have to go up again.

So: India up, China up, Germany up (all relatively). The developing world down, Russia down, most of Europe and Japan down, and President Barack Obama's America down and down. I'd like to believe I am very wrong. I worry that I'm not.

Paul Kennedy is professor of history and director of International Security Studies at Yale University. He is the author/editor of 19 books, including The Rise and Fall of the Great Powers. He wrote this column for Bloomberg News.